UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
T Quarterly
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the
fiscal quarter ended: September 30, 2009 or
£ Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the
transition period from ________________ to ________________
Commission
file number: 0-25426
NATIONAL
INSTRUMENTS CORPORATION
(Exact
name of registrant as specified in its charter)
|
Delaware
|
74-1871327
|
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification Number)
|
|
|
11500
North MoPac Expressway
Austin,
Texas
|
78759
|
|
|
(address
of principal executive offices)
|
(zip
code)
|
Registrant's
telephone number, including area code: (512) 338-9119
__________________________
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes T No
£
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes £ No
£
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer”, “accelerated filer”, and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer T Accelerated
filer £ Non-accelerated
filer £ Smaller
reporting company £
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes £ No
T
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
|
Class
|
Outstanding
at October 26, 2009
|
|
Common
Stock - $0.01 par value
|
77,727,583
|
NATIONAL
INSTRUMENTS CORPORATION
INDEX
|
Page No.
|
||
PART
I - FINANCIAL INFORMATION
|
ITEM
1.
|
Financial
Statements
|
NATIONAL
INSTRUMENTS CORPORATION
(in
thousands, except per share data)
|
September
30,
2009
|
December
31,
2008
|
|||||||
|
Assets
|
(unaudited)
|
|||||||
|
Current
assets:
|
||||||||
|
Cash
and cash
equivalents
|
$ | 232,700 | $ | 229,400 | ||||
|
Short-term
investments
|
43,663 | 6,220 | ||||||
|
Accounts
receivable,
net
|
90,790 | 121,548 | ||||||
|
Inventories,
net
|
88,726 | 107,358 | ||||||
|
Prepaid
expenses and other current
assets
|
40,721 | 43,062 | ||||||
|
Deferred
income taxes,
net
|
21,875 | 21,435 | ||||||
|
Total
current
assets
|
518,475 | 529,023 | ||||||
|
Long-term
investments
|
1,900 | 10,500 | ||||||
|
Property
and equipment,
net
|
150,532 | 154,477 | ||||||
|
Goodwill,
net
|
64,960 | 64,561 | ||||||
|
Intangible
assets,
net
|
44,980 | 41,915 | ||||||
|
Other
long-term
assets
|
35,684 | 32,115 | ||||||
|
Total
assets
|
$ | 816,531 | $ | 832,591 | ||||
|
Liabilities
and Stockholders' Equity
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 25,432 | $ | 30,876 | ||||
|
Accrued
compensation
|
16,230 | 22,012 | ||||||
|
Deferred
revenue
|
49,102 | 45,514 | ||||||
|
Accrued
expenses and other
liabilities
|
10,641 | 18,848 | ||||||
|
Other
taxes
payable
|
13,827 | 13,481 | ||||||
|
Total
current liabilities
|
115,232 | 130,731 | ||||||
|
Deferred
income
taxes
|
23,599 | 25,157 | ||||||
|
Other
long-term
liabilities
|
12,274 | 12,265 | ||||||
|
Total
liabilities
|
151,105 | 168,153 | ||||||
|
Commitments
and contingencies
|
||||||||
|
Stockholders'
equity:
|
||||||||
|
Preferred
stock: par value $0.01; 5,000,000 shares
authorized;
none
issued and
outstanding
|
— | — | ||||||
|
Common
stock: par value $0.01; 180,000,000 shares
authorized;
77,689,355
and 77,193,063 shares issued and outstanding,
respectively
|
777 | 772 | ||||||
|
Additional
paid-in
capital
|
328,196 | 300,352 | ||||||
|
Retained
earnings
|
324,785 | 352,831 | ||||||
|
Accumulated
other comprehensive
income
|
11,668 | 10,483 | ||||||
|
Total
stockholders’ equity
|
665,426 | 664,438 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 816,531 | $ | 832,591 | ||||
The
accompanying notes are an integral part of these financial
statements.
NATIONAL
INSTRUMENTS CORPORATION
(in
thousands, except per share data)
(unaudited)
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
September
30,
|
September
30,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Net
sales:
|
||||||||||||||||
|
Product
|
$ | 152,106 | $ | 200,871 | $ | 435,348 | $ | 578,222 | ||||||||
|
Software
maintenance
|
12,929 | 14,167 | 39,649 | 40,208 | ||||||||||||
|
Total
net
sales
|
165,035 | 215,038 | 474,997 | 618,430 | ||||||||||||
|
Cost
of sales:
|
||||||||||||||||
|
Product
|
$ | 40,476 | $ | 52,957 | $ | 119,234 | $ | 152,487 | ||||||||
|
Software
maintenance
|
1,423 | 1,550 | 4,034 | 4,529 | ||||||||||||
|
Total
cost of
sales
|
41,899 | 54,507 | 123,268 | 157,016 | ||||||||||||
|
Gross
profit
|
123,136 | 160,531 | 351,729 | 461,414 | ||||||||||||
|
Operating
expenses:
|
||||||||||||||||
|
Sales
and
marketing
|
$ | 65,126 | $ | 78,392 | $ | 199,089 | $ | 230,638 | ||||||||
|
Research
and
development
|
35,016 | 37,016 | 99,252 | 105,808 | ||||||||||||
|
General
and
administrative
|
12,306 | 17,177 | 42,838 | 51,122 | ||||||||||||
|
Total
operating
expenses
|
112,448 | 132,585 | 341,179 | 387,568 | ||||||||||||
|
Operating
income
|
10,688 | 27,946 | 10,550 | 73,846 | ||||||||||||
|
Other
income (expense):
|
||||||||||||||||
|
Interest
income
|
$ | 339 | $ | 1,374 | $ | 1,335 | $ | 5,025 | ||||||||
|
Net
foreign exchange gain
(loss)
|
940 | (3,025 | ) | 1,301 | (1,791 | ) | ||||||||||
|
Other
income,
net
|
482 | 80 | 979 | 13 | ||||||||||||
|
Income
before income taxes
|
12,449 | 26,375 | 14,165 | 77,093 | ||||||||||||
|
Provision
for (benefit from) income taxes
|
2,518 | 3,216 | (554 | ) | 11,584 | |||||||||||
|
Net
income
|
$ | 9,931 | $ | 23,159 | $ | 14,719 | $ | 65,509 | ||||||||
|
Basic
earnings per share
|
$ | 0.13 | $ | 0.29 | $ | 0.19 | $ | 0.83 | ||||||||
|
Weighted
average shares outstanding – basic
|
77,653 | 78,834 | 77,497 | 78,701 | ||||||||||||
|
Diluted
earnings per share
|
$ | 0.13 | $ | 0.29 | $ | 0.19 | $ | 0.82 | ||||||||
|
Weighted
average shares outstanding – diluted
|
78,103 | 79,841 | 77,842 | 79,773 | ||||||||||||
|
Dividends
declared per
share
|
$ | 0.12 | $ | 0.11 | $ | 0.36 | $ | 0.33 | ||||||||
The
accompanying notes are an integral part of these financial
statements.
NATIONAL
INSTRUMENTS CORPORATION
(in
thousands)
(unaudited)
|
Nine
Months Ended
|
||||||||
|
September
30,
|
||||||||
|
2009
|
2008
|
|||||||
|
Cash
flow from operating activities:
|
||||||||
|
Net
income
|
$ | 14,719 | $ | 65,509 | ||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
|
Depreciation
and
amortization
|
28,536 | 27,901 | ||||||
|
Stock-based
compensation
|
15,238 | 14,690 | ||||||
|
Provision
for (benefit from) deferred income
taxes
|
(6,802 | ) | 3,008 | |||||
|
Tax
expense (benefit from) stock option
plans
|
1,445 | (1,243 | ) | |||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Accounts
receivable
|
30,758 | 10,611 | ||||||
|
Inventories
|
18,632 | (16,954 | ) | |||||
|
Prepaid
expenses and other
assets
|
3,920 | (12,895 | ) | |||||
|
Accounts
payable
|
(5,444 | ) | (4,791 | ) | ||||
|
Deferred
revenue
|
3,588 | 5,985 | ||||||
|
Taxes
and other
liabilities
|
(14,245 | ) | 14,138 | |||||
|
Net
cash provided by operating
activities
|
90,345 | 105,959 | ||||||
|
Cash
flow from investing activities:
|
||||||||
|
Capital
expenditures
|
(12,331 | ) | (21,115 | ) | ||||
|
Capitalization
of internally developed
software
|
(10,611 | ) | (8,687 | ) | ||||
|
Additions
to other
intangibles
|
(4,009 | ) | (2,603 | ) | ||||
|
Acquisition,
net of cash
received
|
— | (17,310 | ) | |||||
|
Purchases
of short-term and long-term
investments
|
(38,876 | ) | (17,315 | ) | ||||
|
Sales
and maturities of short-term and long-term investments
|
10,034 | 39,080 | ||||||
|
Purchases
of foreign currency option
contracts
|
— | (2,784 | ) | |||||
|
Net
cash (used by) provided by investing
activities
|
(55,793 | ) | (30,734 | ) | ||||
|
Cash
flow from financing activities:
|
||||||||
|
Proceeds
from issuance of common
stock
|
16,351 | 26,628 | ||||||
|
Repurchase
of common
stock
|
(18,200 | ) | (58,215 | ) | ||||
|
Dividends
paid
|
(27,958 | ) | (26,055 | ) | ||||
|
Tax
expense (benefit from) stock option
plans
|
(1,445 | ) | 1,243 | |||||
|
Net
cash (used by) financing
activities
|
(31,252 | ) | (56,399 | ) | ||||
|
Net
change in cash and cash
equivalents
|
3,300 | 18,826 | ||||||
|
Cash
and cash equivalents at beginning of
period
|
229,400 | 194,839 | ||||||
|
Cash
and cash equivalents at end of
period
|
$ | 232,700 | $ | 213,665 | ||||
The
accompanying notes are an integral part of these financial
statements.
NATIONAL
INSTRUMENTS CORPORATION
NOTE
1 – Basis of Presentation
The
accompanying unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto for the
year ended December 31, 2008, included in our annual report on Form 10-K, filed
with the Securities and Exchange Commission. In our opinion, the accompanying
consolidated financial statements reflect all adjustments (consisting only of
normal recurring items) considered necessary to present fairly our financial
position at September 30, 2009 and December 31, 2008, and the results of our
operations for the three and nine month periods ended September 30, 2009 and
September 30, 2008 and the cash flows for the nine month periods ended September
30, 2009 and 2008. Operating results for the three-month and nine-month periods
ended September 30, 2009, are not necessarily indicative of the results that may
be expected for the year ending December 31, 2009.
Certain
prior year amounts have been reclassified to conform to the 2009 presentation as
shown in the following tables:
|
Three
Months Ended
|
Nine Months
Ended
|
|||||||
|
September 30,
2008
|
September 30,
2008
|
|||||||
|
(unaudited)
|
(unaudited)
|
|||||||
|
Cost
of sales as previously
reported
|
$ | 53,537 | $ | 154,227 | ||||
|
Technical
support costs previously reported as sales and marketing
(a)
|
970 | 2,789 | ||||||
|
Cost
of sales adjusted for
reclassification
|
$ | 54,507 | $ | 157,016 | ||||
|
Sales
and marketing as previously
reported
|
$ | 79,362 | $ | 233,427 | ||||
|
Technical
support costs as previously reported as sales and marketing
(a)
|
(970 | ) | (2,789 | ) | ||||
|
Sales
and marketing adjusted for
reclassification
|
$ | 78,392 | $ | 230,638 | ||||
|
(a)
|
Since
December 31, 2008, we have been separately reporting software maintenance
revenue and cost of software maintenance revenue in our Consolidated
Statements of Income. We added this disclosure due to the increasing
percentage of our revenue coming from software maintenance. As part of
this expanded disclosure, some technical support costs previously reported
as a component of sales and marketing expense are reported as cost of
software maintenance. This change has had no impact on our operating
income, net income or earnings per
share.
|
We have
historically recorded the excess of the purchase price over the par or stated
value of retired shares of our common stock as a reduction of additional paid-in
capital. We completed our review of this accounting policy under Financial
Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 505,
Equity. Based on this
review, we have reclassified a portion of the excess of the purchase price over
the par or stated value of retired shares of our common stock from a reduction
of additional paid-in capital to a reduction of retained earnings. The effects
of this adjustment on our previously reported paid-in capital and retained
earnings as of December 31, 2008, are detailed in the table below. This
reclassification did not have any impact on previously reported statements of
income, earning per share amounts, statements of cash flows or total
stockholders’ equity.
|
Amounts
as previously reported at December 31, 2008
|
Effect
of reclassification
|
Amounts
adjusted for reclassification at December 31, 2008
|
||||||||||
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
||||||||||
|
Additional
paid-in
capital
|
39,673 | 260,679 | 300,352 | |||||||||
|
Retained
earnings
|
613,510 | (260,679 | ) | 352,831 | ||||||||
During
the nine months ended September 30, 2009, we used $18.2 million to retire an
additional 869,600 shares of our common stock. As a result, we reduced
additional paid-in capital by $3.4 million and retained earnings by $14.8
million.
NOTE
2 – Earnings Per Share
Basic
earnings per share (“EPS”) is computed by dividing net income by the weighted
average number of common shares outstanding during each period. Diluted EPS is
computed by dividing net income by the weighted average number of common shares
and common share equivalents outstanding (if dilutive) during each period. The
number of common share equivalents, which include stock options and restricted
stock units, is computed using the treasury stock method.
The
reconciliation of the denominators used to calculate basic EPS and diluted EPS
for the three month and nine month periods ended September 30, 2009 and 2008,
respectively, are as follows (in thousands):
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
September
30,
|
September
30,
|
|||||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Weighted
average shares outstanding-basic
|
77,653 | 78,834 | 77,497 | 78,701 | ||||||||||||
|
Plus:
Common share equivalents
|
||||||||||||||||
|
Stock
options, restricted stock
units
|
450 | 1,007 | 345 | 1,072 | ||||||||||||
|
Weighted
average shares outstanding-diluted
|
78,103 | 79,841 | 77,842 | 79,773 | ||||||||||||
Stock
options to acquire 3,509,000 shares and 2,025,000 shares for the three month
periods ended September 30, 2009 and 2008, respectively, and 3,619,000 shares
and 2,325,000 shares for the nine month periods ended September 30, 2009 and
2008, respectively, were excluded in the computations of diluted EPS because the
effect of including the stock options would have been
anti-dilutive.
NOTE
3 – Cash, Cash Equivalents, Short-Term and Long-Term Investments
Cash,
cash equivalents, short-term and long-term investments consist of the following
(in thousands):
|
As
of
September
30, 2009
|
As
of
December
31, 2008
|
|||||||
|
(unaudited)
|
||||||||
|
Cash
and cash equivalents:
|
||||||||
|
Cash
|
$ | 70,321 | $ | 100,967 | ||||
|
Cash
equivalents:
|
||||||||
|
Debt
securities
|
— | — | ||||||
|
Time
deposits
|
— | 73,400 | ||||||
|
Money
market
accounts
|
162,379 | 55,033 | ||||||
|
Total
cash and cash
equivalents
|
$ | 232,700 | $ | 229,400 | ||||
|
Short-term
investments:
|
||||||||
|
Debt
securities
|
$ | 32,310 | $ | 6,220 | ||||
|
Time
deposits
|
2,753 | — | ||||||
|
Auction
rate
securities
|
8,223 | — | ||||||
|
Auction
rate securities put
option
|
377 | — | ||||||
|
Total
short-term
investments
|
43,663 | 6,220 | ||||||
|
Long-term
investments:
|
||||||||
|
Auction
rate
securities
|
— | 6,964 | ||||||
|
Auction
rate securities put
option
|
— | 1,636 | ||||||
|
Other
long-term
investments
|
1,900 | 1,900 | ||||||
|
Total
investments
|
$ | 45,563 | $ | 16,720 | ||||
|
Total
cash, cash equivalents and
investments
|
$ | 278,263 | $ | 246,120 | ||||
The
following table summarizes unrealized gains and losses related to our
investments designated as available-for-sale (in thousands):
|
As
of September 30, 2009
|
||||||||||||||||
|
(unaudited)
|
||||||||||||||||
|
Adjusted
Cost
|
Gross
Unrealized Gain
|
Gross
Unrealized Loss
|
Fair
Value
|
|||||||||||||
|
Debt
securities
|
$ | 32,183 | $ | 130 | $ | (3 | ) | $ | 32,310 | |||||||
|
Time
deposits
|
2,753 | — | — | 2,753 | ||||||||||||
|
Auction
rate
securities
|
8,600 | — | (377 | ) | 8,223 | |||||||||||
|
Auction
rate securities put
option
|
— | 377 | — | 377 | ||||||||||||
|
Other
long-term
investments
|
1,900 | — | — | 1,900 | ||||||||||||
|
Total
investments
|
$ | 45,436 | $ | 507 | $ | (380 | ) | $ | 45,563 | |||||||
|
As
of December 31, 2008
|
||||||||||||||||
|
Adjusted
Cost
|
Gross
Unrealized Gain
|
Gross
Unrealized Loss
|
Fair
Value
|
|||||||||||||
|
Debt
securities
|
$ | 6,199 | $ | 28 | $ | (7 | ) | $ | 6,220 | |||||||
|
Auction
rate
securities
|
8,600 | — | (1,636 | ) | 6,964 | |||||||||||
|
Auction
rate securities put
option
|
— | 1,636 | — | 1,636 | ||||||||||||
|
Other
long-term
investments
|
1,900 | — | — | 1,900 | ||||||||||||
|
Total
investments
|
$ | 16,699 | $ | 1,664 | $ | (1,643 | ) | $ | 16,720 | |||||||
We account for our investments in debt and equity instruments under FASB ASC 320, Investments – Debt and Equity Securities (FASB ASC 320). Our investments are classified as available-for-sale and accordingly are reported at fair value, with unrealized gains and losses reported as other comprehensive income, a component of shareholders’ equity. Unrealized losses are charged against income when a decline in fair value is determined to be other than temporary. Investments with maturities beyond one year are classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. See Note 4 – Fair Value Measurements of Notes to Consolidated Financial Statements for further discussion regarding methods and assumptions to determine fair value.
NOTE
4 – Fair Value Measurements
FASB ASC
820, Fair Value Measurements
and Disclosures (FASB ASC 820) clarifies the definition of fair value,
prescribes methods for measuring fair value, establishes a fair value hierarchy
based on the inputs used to measure fair value and expands disclosures about the
use of fair value measurements. Effective January 1, 2009, we adopted FASB ASC
820 for our nonfinancial assets and nonfinancial liabilities, except those items
recognized or disclosed at fair value on an annual or more frequently recurring
basis. The adoption of FASB ASC 820 did not have a material impact on our fair
value measurements as we did not have any items that were measured at fair value
on a nonrecurring basis for the nine months ended September 30,
2009. In April 2009, FASB ASC 820 was updated to provide
additional guidance for estimating fair value when the volume and level of
activity for the asset or liability have significantly decreased. The update
also includes guidance on identifying circumstances that indicate a transaction
is not orderly. We adopted the update on April 1, 2009 and it did not have
a material impact on our fair value measurements.
The
following tables present our assets and liabilities that are measured at fair
value on a recurring basis and are categorized using the fair value hierarchy.
The fair value hierarchy has three levels based on the reliability of the inputs
used to determine fair value (in thousands).
|
Fair
Value Measurements at Reporting Date Using (unaudited)
|
||||||||||||||||
|
Description
|
September
30, 2009
|
Quoted
Prices in Active Markets for Identical Assets
(Level
1)
|
Significant
Other Observable Inputs
(Level
2)
|
Significant
Unobservable Inputs
(Level
3)
|
||||||||||||
|
Assets
|
||||||||||||||||
|
Money
Market
Funds
|
$ | 162,379 | $ | 162,379 | $ | — | $ | — | ||||||||
|
Available
for sale securities:
|
||||||||||||||||
|
Short-term
debt
securities
|
43,663 | 35,063 | — | 8,600 | ||||||||||||
|
Long-term
debt
securities
|
— | — | — | — | ||||||||||||
|
Derivatives
|
10,735 | — | 10,735 | — | ||||||||||||
|
Total
Assets
|
$ | 216,777 | $ | 197,442 | $ | 10,735 | $ | 8,600 | ||||||||
|
Liabilities
|
||||||||||||||||
|
Derivatives
|
(2,070 | ) | — | (2,070 | ) | — | ||||||||||
|
Total
Liabilities
|
$ | (2,070 | ) | $ | — | $ | (2,070 | ) | $ | — | ||||||
|
Fair
Value Measurements Using Significant Unobservable Inputs
(Level
3)
|
||||
|
Long-term
investments available for sale
|
||||
|
(unaudited)
|
||||
|
Beginning
Balance at December 31,
2008
|
$ | 8,600 | ||
|
Total
gains (realized/unrealized)
|
||||
|
Included
in
earnings
|
377 | |||
|
Included
in other comprehensive
income
|
||||
|
Total
(losses) (realized/unrealized)
|
||||
|
Included
in earnings
|
(377 | ) | ||
|
Included
in other comprehensive income
|
— | |||
|
Purchases,
issuances and settlements
|
— | |||
|
Transfer
in and/or out of Level 3
|
— | |||
|
Ending
Balance at September 30,
2009
|
$ | 8,600 | ||
|
The
amount of total gains or (losses) for the period included in earnings (or
changes in net assets) attributable to the change in unrealized gains or
losses relating to assets still held at the reporting date
|
— | |||
| $ | — | |||
Short-term
debt securities available-for-sale are valued using a market approach (Level 1)
based on the quoted market prices of identical instruments when available or
other observable inputs such as trading prices of identical instruments in
inactive markets. Short-term investments available-for-sale consist of debt
securities issued by states of the U.S. and political subdivisions of the
states, corporate debt securities and debt securities issued by U.S. government
corporations and agencies. All short-term investments available-for-sale have
contractual maturities of less than 24 months.
Derivatives
include foreign currency forward and option contracts. Our foreign currency
forward contracts are valued using an income approach (Level 2) based on the
spot rate less the contract rate multiplied by the notional amount. Our foreign
currency option contracts are valued using a market approach based on the quoted
market prices which are derived from observable inputs including current and
future spot rates, interest rate spreads as well as quoted market prices of
identical instruments.
Short-term
debt securities available-for-sale included in Level 3 are reported at their
fair market value and consist of auction rate securities backed by education
loan revenue bonds. One of our auction rate securities is from the Vermont
Student Assistance Corporation and has a par value of $2.2 million. The other of
our auction rate securities is from the New Hampshire Health and Education
Facilities Authority and has a par value of $6.4 million. The ratings for these
securities at September 30, 2009, were Baa3/A/AAA and Aaa/NR/AAA, respectively.
We note that the bonds from the Vermont Student Assistance Corporation carried
ratings of Aa3/A/AAA at December 31, 2008. Historically, we reported the fair
market value of these securities at par as differences between par value and the
purchase price or settlement value were historically comprised of accrued
interest. Auction rate securities are variable rate debt instruments whose
interest rates are typically reset approximately every 7 to 35 days. On October
2, 2009, and in prior auction periods beginning in February 2008, the auction
process for these securities failed. At September 30, 2009, we reported these
short-term investments at their estimated fair market value of $8.2
million.
In
November 2008, we accepted the UBS Auction Rate Securities Rights (the “Rights”)
agreement offered by UBS as a liquidity alternative to the failed auction
process. This Rights agreement is related to the auction rates securities
discussed above. The Rights agreement is a nontransferable right to sell our
auction rate securities, at par value, back to UBS at any time during the period
June 30, 2010, through July 2, 2012. At September 30, 2009, we reported the
Rights agreement at its estimated fair market value of $0.4 million as a
component of short-term debt securities available for sale.
At June
30, 2009, we classified our auction rate securities and our Rights agreement as
long-term but are now reporting them as short-term. We continue to have the
ability to hold our auction rate securities to their ultimate maturities which
are in excess of one year and we have not made a determination as to whether we
will exercise our right under the Rights agreement or if we do choose to
exercise our option, at what point during the period June 30, 2010 through July
2, 2012, we would exercise our option. However, due to the fact that our Rights
agreement has an initial exercise date that is less than one year from now, we
are now reporting our auction rate securities and the corresponding Rights
agreement as short-term. We have recorded the unrealized loss related to the
auction rate securities and the unrealized gain related to the Rights agreement
as a component of other income (expense), in our Consolidated Statements of
Income.
The
estimated fair market value of both the auction rate securities and the Rights
agreement was determined using significant unobservable inputs (Level 3) as
prescribed by FASB ASC 820. We considered many factors in determining the fair
market value of the auction rate securities as well as our corresponding Rights
agreement at September 30, 2009, including the fact that the debt instruments
underlying the auction rate securities have redemption features which call for
redemption at 100% of par value, current credit curves for like securities and
discount factors to account for the illiquidity of the market for these
securities. During the three months ended September 30, 2009, we did not make
any changes to our valuation techniques or related inputs.
NOTE
5 – Derivative Instruments and Hedging Activities
FASB ASC
815, Derivatives and
Hedging (FASB ASC 815), requires companies to recognize all of their
derivative instruments as either assets or liabilities in the statement of
financial position at fair value. The accounting for changes in the fair value
(i.e., gains or losses) of a derivative instrument depends on whether it has
been designated and qualifies as part of a hedging relationship and further, on
the type of hedging relationship. For those derivative instruments that are
designated and qualify as hedging instruments, a company must designate the
hedging instrument, based upon the exposure being hedged, as a fair value hedge,
cash flow hedge, or a hedge of a net investment in a foreign
operation.
We have
operations in over 40 countries. Sales outside of the Americas as a percentage
of consolidated sales were 54% and 55% in each of the three month periods ended
September 30, 2009 and 2008, respectively, and 55% and 56% in each of the nine
month periods ended September 30, 2009 and 2008, respectively. Our activities
expose us to a variety of market risks, including the effects of changes in
foreign currency exchange rates. These financial risks are monitored and managed
by us as an integral part of our overall risk management program.
We
maintain a foreign currency risk management strategy that uses derivative
instruments (foreign currency forward and purchased option contracts) to help
protect our earnings and cash flows from fluctuations caused by the volatility
in currency exchange rates. Movements in foreign currency exchange rates pose a
risk to our operations and competitive position, since exchange rate changes may
affect our profitability and cash flow, and the business or pricing strategies
of our non-U.S. based competitors.
The vast
majority of our foreign sales are denominated in the customers’ local currency.
We purchase foreign currency forward and option contracts as hedges of
forecasted sales that are denominated in foreign currencies and as hedges of
foreign currency denominated receivables. These contracts are entered into to
protect against the risk that the eventual dollar-net-cash inflows resulting
from such sales or firm commitments will be adversely affected by changes in
exchange rates. We also purchase foreign currency forward contracts as hedges of
forecasted expenses that are denominated in foreign currencies. These contracts
are entered into to protect against the risk that the eventual dollar-net-cash
outflows resulting from foreign currency operating and cost of revenue expenses
will be adversely affected by changes in exchange rates.
In
accordance with FASB ASC 815, we designate foreign currency forward and
purchased option contracts as cash flow hedges of forecasted revenues or
forecasted expenses. In addition, we hedge our foreign currency denominated
balance sheet exposures using foreign currency forward contracts. These
derivatives are not designated as hedging instruments under FASB ASC 815. None
of our derivative instruments contain a credit-risk-related contingent
feature.
Cash
flow hedges
To
protect against the reduction in value caused by a fluctuation in foreign
currency exchange rates of forecasted foreign currency cash flows resulting from
international sales over the next one to two years, we have instituted a foreign
currency cash flow hedging program. We hedge portions of our forecasted revenue
and forecasted expenses denominated in foreign currencies with forward and
purchased option contracts. For forward contracts, when the dollar strengthens
significantly against the foreign currencies, the change in the present value of
future foreign currency cash flows may be offset by the change in the fair value
of the forward contracts designated as hedges. For option contracts, when the
dollar strengthens significantly against the foreign currencies, the change in
the present value of future foreign currency cash flows may be offset by the
change in the fair value of the option contracts net of the premium paid
designated as hedges. Our foreign currency purchased option contracts are
purchased “at-the-money” or “out-of-the-money”. We purchase foreign currency
forward and option contracts for up to 100% of our forecasted exposures in
selected currencies (primarily in Euro, Japanese yen, British pound sterling,
South Korean won and Hungarian forint) and limit the duration of these contracts
to 40 months or less.
For
derivative instruments that are designated and qualify as a cash flow hedge, the
effective portion of the gain or loss on the derivative is reported as a
component of accumulated other comprehensive income (“OCI”) and reclassified
into earnings in the same line item (net sales, operating expenses, or cost of
sales) associated with the forecasted transaction and in the same period or
periods during which the hedged transaction affects earnings. Gains and losses
on the derivative representing either hedge ineffectiveness or hedge components
excluded from the assessment of effectiveness are recognized in current earnings
or expenses during the current period and are classified as a component of “net
foreign exchange gain (loss)”. Hedge effectiveness of foreign currency forwards
and purchased option contracts designated as cash flow hedges are measured by
comparing the hedging instrument’s cumulative change in fair value from
inception to maturity to the forecasted transaction’s terminal
value.
We held
forward contracts with a notional amount of $28.6 million dollar equivalent of
Euro, $5.1 million dollar equivalent of British pound sterling, $20.7 million
dollar equivalent of Japanese yen, and $22.9 million dollar equivalent of
Hungarian forint at September 30, 2009. These contracts are for terms of up to
24 months. At December 31, 2008, we held forward contracts with a notional
amount of $54.9 million dollar equivalent of Euro, $6.2 million dollar
equivalent of British pound sterling, $18.9 million dollar equivalent of
Japanese yen, $4.7 million dollar equivalent of South Korean won and $21.7
million dollar equivalent of Hungarian forint.
We held
purchased option contracts with a notional amount of $60.9 million dollar
equivalent of Euro at September 30, 2009. These contracts are for terms of up to
24 months. At December 31, 2008, we held purchased option contracts with a
notional amount of $111.3 million dollar equivalent of Euro.
At
September 30, 2009, we expect to reclassify $1.1 million of gains and $988,000
of losses on derivative instruments from accumulated other comprehensive income
to net sales during the next twelve months when the hedged international sales
occur. At September 30, 2009, we expect to reclassify $3.6 million of gains on
derivative instruments from accumulated OCI to cost of sales and $1.8 million of
gains on derivative instruments from accumulated OCI to operating expenses
during the next twelve months when the hedged international expenses occur.
Expected amounts are based on derivative valuations at September 30, 2009.
Actual results may vary as a result of changes in the corresponding exchange
rate subsequent to this date.
During
the nine months ended September 30, 2009, hedges with a notional amount of $7.3
million were determined to be ineffective. As a result, we recorded a net gain
of $657,000 related to these hedges as a component of “net foreign exchange gain
(loss)” during the nine months ended September 30, 2009. We did not record any
gains or losses due to the ineffectiveness of our hedges during the nine months
ended September 30, 2008.
Other
Derivatives
Other
derivatives not designated as hedging instruments under FASB ASC 815 consist
primarily of foreign currency forward contracts that we use to hedge our foreign
denominated net receivable or net payable positions to protect against the
change in value caused by a fluctuation in foreign currency exchange rates. We
typically hedge up to 90% of our outstanding foreign denominated net receivables
or net payables and typically limit the duration of these foreign currency
forward contracts to approximately 90 days. The gain or loss on the derivatives
as well as the offsetting gain or loss on the hedge item attributable to the
hedged risk is recognized in current earnings under the line item “net foreign
exchange gain (loss)”. As of September 30, 2009 and December 31, 2008, we held
foreign currency forward contracts with a notional amount of $36.5 million and
$67.1 million, respectively.
Effective
January 1, 2009, we adopted the updated disclosure requirements of FASB ASC 815.
The following table presents the fair value of derivative instruments on our
Consolidated Balance Sheets and the effect of derivative instruments on our
Consolidated Statements of Income.
Fair
Values of Derivative Instruments (in thousands):
|
In
thousands
|
Asset
Derivatives
|
|||||||||
|
September
30, 2009
|
December
31, 2008
|
|||||||||
|
Balance
Sheet Location
|
Fair
Value
|
Balance
Sheet Location
|
Fair
Value
|
|||||||
|
(unaudited)
|
||||||||||
|
Derivatives
designated as hedging
instruments
under FASB ASC 815
|
||||||||||
|
Foreign
exchange contracts – ST forwards
|
Prepaid
expenses and other current assets
|
$ | 6,530 |
Prepaid
expenses and other current assets
|
$ | 5,260 | ||||
|
Foreign
exchange contracts – LT forwards
|
Other
long-term assets
|
1,778 |
Other
long-term assets
|
2,654 | ||||||
|
Foreign
exchange contracts – ST options
|
Prepaid
expenses and other current assets
|
1,331 |
Prepaid
expenses and other current assets
|
5,705 | ||||||
|
Foreign
exchange contracts – LT options
|
Other
long-term assets
|
585 |
Other
long-term assets
|
3,838 | ||||||
|
Total
derivatives designated as
hedging
instruments under FASB ASC 815
|
$ | 10,224 | $ | 17,457 | ||||||
|
Derivatives
not designated as
hedging
instruments under FASB ASC 815
|
||||||||||
|
Foreign
exchange contracts – ST forwards
|
Prepaid
expenses and other current assets
|
$ | 511 |
Prepaid
expenses and other current assets
|
$ | 2,745 | ||||
|
Total
derivatives not designated as
hedging
instruments under FASB ASC 815
|
$ | 511 | $ | 2,745 | ||||||
|
Total
derivatives
|
$ | 10,735 | $ | 20,202 | ||||||
|
Liability
Derivatives
|
||||||||||
|
September
30, 2009
|
December
31, 2008
|
|||||||||
|
Balance
Sheet Location
|
Fair
Value
|
Balance
Sheet Location
|
Fair
Value
|
|||||||
|
(unaudited)
|
||||||||||
|
Derivatives
designated as hedging
instruments
under FASB ASC 815
|
||||||||||
|
Foreign
exchange contracts – ST forwards
|
Accrued
expenses and other liabilities
|
$ | (399 | ) |
Accrued
expenses and other liabilities
|
$ | (1,803 | ) | ||
|
Foreign
exchange contracts – LT forwards
|
Other
long-term liabilities
|
— |
Other
long-term liabilities
|
— | ||||||
|
Foreign
exchange contracts – ST options
|
Accrued
expenses and other liabilities
|
— |
Accrued
expenses and other liabilities
|
— | ||||||
|
Foreign
exchange contracts – LT options
|
Other
long-term liabilities
|
— |
Other
long-term liabilities
|
— | ||||||
|
Total
derivatives designated as
hedging
instruments under FASB ASC 815
|
$ | (399 | ) | $ | (1,803 | ) | ||||
|
Derivatives
not designated as
hedging
instruments under FASB ASC 815
|
||||||||||
|
Foreign
exchange contracts – ST forwards
|
Accrued
expenses and other liabilities
|
$ | (1,671 | ) |
Accrued
expenses and other liabilities
|
$ | (3,280 | ) | ||
|
Total
derivatives not designated as
hedging
instruments under FASB ASC 815
|
$ | (1,671 | ) | $ | (3,280 | ) | ||||
|
Total
derivatives
|
$ | (2,070 | ) | $ | (5,083 | ) | ||||
The
following unaudited table shows the effect of derivative instruments on our
Consolidated Statements of Income for the three months ended September 30, 2009
(in thousands):
|
Derivatives
in FASB ASC 815
Cash Flow Hedging Relationship
|
Amount
of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion) (in
thousands)
|
Location
of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective
Portion)
|
Amount
of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective
Portion) (in thousands)
|
Location
of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion
and Amount Excluded from Effectiveness Testing)
|
Amount
of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion
and Amount Excluded from Effectiveness Testing)
|
|||||||||
|
2009
|
2009
|
2009
|
||||||||||||
|
Foreign
exchange contracts – forwards and options
|
$ | (5,037 | ) |
Net
sales
|
$ | (401 | ) |
Net
foreign exchange gain (loss)
|
$ | 181 | ||||
|
Foreign
exchange contracts – forwards and options
|
1,465 |
Cost
of sales
|
(72 | ) |
Net
foreign exchange gain (loss)
|
395 | ||||||||
|
Foreign
exchange contracts – forwards and options
|
82 |
Operating
expenses
|
380 |
Net
foreign exchange gain (loss)
|
81 | |||||||||
|
Total
|
$ | (3,490 | ) | $ | (93 | ) | $ | 657 | ||||||
|
Derivatives
not Designated as Hedging Instruments under FASB ASC
815
|
Location
of Gain (Loss) Recognized in Income on Derivative
|
Amount
of Gain (Loss) Recognized in Income on Derivative
|
|||
|
2009
|
|||||
|
Foreign
exchange contracts – forwards
|
Net
foreign exchange gain/(loss)
|
$ | (1,607 | ) | |
|
Total
|
$ | (1,607 | ) | ||
The
following unaudited table shows the effect of derivative instruments on our
Consolidated Statements of Income for the nine months ended September 30, 2009
(in thousands):
|
Derivatives
in FASB ASC 815
Cash Flow Hedging Relationship
|
Amount
of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion) (in
thousands)
|
Location
of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective
Portion)
|
Amount
of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective
Portion) (in thousands)
|
Location
of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion
and Amount Excluded from Effectiveness Testing)
|
Amount
of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion
and Amount Excluded from Effectiveness Testing)
|
|||||||||
|
2009
|
2009
|
2009
|
||||||||||||
|
Foreign
exchange contracts – forwards and options
|
$ | (8,822 | ) |
Net
sales
|
$ | 2,578 |
Net
foreign exchange gain (loss)
|
$ | 1,132 | |||||
|
Foreign
exchange contracts – forwards and options
|
2,776 |
Cost
of sales
|
(740 | ) |
Net
foreign exchange gain (loss)
|
(44 | ) | |||||||
|
Foreign
exchange contracts – forwards and options
|
1,747 |
Operating
expenses
|
184 |
Net
foreign exchange gain (loss)
|
81 | |||||||||
|
Total
|
$ | (4,299 | ) | $ | 2,022 | $ | 1,169 | |||||||
|
Derivatives
not Designated as Hedging Instruments under FASB ASC
815
|
Location
of Gain (Loss) Recognized in Income on Derivative
|
Amount
of Gain (Loss) Recognized in Income on Derivative
|
|||
|
2009
|
|||||
|
Foreign
exchange contracts – forwards
|
Net
foreign exchange gain/(loss)
|
$ | (1,791 | ) | |
|
Total
|
$ | (1,791 | ) | ||
NOTE 6 – Inventories
Inventories,
net consist of the following (in thousands):
|
September
30,
|
December
31,
|
|||||||
|
2009
|
2008
|
|||||||
|
(unaudited)
|
||||||||
|
Raw
materials
|
$ | 41,745 | $ | 48,004 | ||||
|
Work-in-process
|
2,422 | 4,150 | ||||||
|
Finished
goods
|
44,559 | 55,204 | ||||||
| $ | 88,726 | $ | 107,358 | |||||
NOTE
7 – Intangibles
Intangibles
at September 30, 2009 and December 31, 2008 are as follows:
|
September 30, 2009
|
December 31, 2008
|
|||||||||||||||||||||||
|
(unaudited)
|
||||||||||||||||||||||||
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Net
Carrying Amount
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Net
Carrying Amount
|
|||||||||||||||||||
|
Capitalized
software development costs
|
$ | 36,838 | $ | (17,966 | ) | $ | 18,872 | $ | 25,610 | $ | (11,344 | ) | $ | 14,266 | ||||||||||
|
Acquired
technology
|
28,037 | (19,987 | ) | 8,050 | 27,503 | (16,804 | ) | 10,699 | ||||||||||||||||
|
Patents
|
18,549 | (5,145 | ) | 13,404 | 16,068 | (4,506 | ) | 11,562 | ||||||||||||||||
|
Leasehold
equipment and other
|
12,451 | (7,797 | ) | 4,654 | 11,401 | (6,013 | ) | 5,388 | ||||||||||||||||
| $ | 95,875 | $ | (50,895 | ) | $ | 44,980 | $ | 80,582 | $ | (38,667 | ) | $ | 41,915 | |||||||||||
Software
development costs capitalized during the three month periods ended September 30,
2009 and 2008, were $1.3 million and $1.1 million, respectively. Included in
these capitalized costs for the three month periods ended September 30, 2009 and
2008, were costs related to stock based compensation of $71,000 and $49,000,
respectively. Capitalized software amortization expense was $2.5 million and
$2.9 million during the three month periods ended September 30, 2009 and 2008,
respectively. During the nine month periods ended September 30, 2009 and 2008,
we capitalized software development costs of $11.2 million and $8.7 million,
respectively. Included in these capitalized costs for the nine month periods
ended September 30, 2009 and 2008, were costs related to stock based
compensation of $617,000 and $409,000, respectively. During the nine month
periods ended September 30, 2009 and 2008, capitalized software amortization
expense was $6.6 million and $7.8 million, respectively.
Amortization
of capitalized software development costs is computed on an individual product
basis for those products available for market and is recognized based on the
product’s estimated economic life, generally three years. Patents are amortized
using the straight-line method over their estimated period of benefit, generally
ten to seventeen years. Total intangible assets amortization expenses were $4.7
million and $4.4 million during the three month periods ended September 30, 2009
and 2008, respectively, and $12.2 million and $12.3 million during the nine
month periods ended September 30, 2009 and 2008, respectively.
Acquired
core technology and intangible assets are amortized over their useful lives,
which range from three to eight years. Amortization expense for intangible
assets acquired was approximately $1.0 million and $1.1 million for the three
month periods ended September 30, 2009 and 2008, respectively, of which
approximately $853,000 and $937,000 was recorded in cost of sales, respectively,
and approximately $126,000 and $139,000 was recorded in operating expenses,
respectively. For the nine month periods ended September 30, 2009 and 2008,
amortization expense for intangible assets acquired was approximately $3.0
million and $3.2 million, respectively, of which approximately $2.6 million and
$2.7 million was recorded in cost of sales, respectively, and approximately
$378,000 and $449,000 was recorded in operating expenses,
respectively.
NOTE
8 – Goodwill
The
carrying amount of goodwill for 2009 is as follows:
|
Amount
(in thousands)
|
||||
|
Balance
as of December 31,
2008
|
$ | 64,561 | ||
|
Acquisitions
|
— | |||
|
Divestitures
|
— | |||
|
Foreign
currency translation
impact
|
399 | |||
|
Balance
as of September 30,
2009
|
$ | 64,960 | ||
The
excess purchase price over the fair value of assets acquired is recorded as
goodwill. As we have one operating segment, we allocate goodwill to one
reporting unit for goodwill impairment testing. In accordance with FASB ASC 350,
Intangibles – Goodwill and
Other (FASB ASC 350), goodwill is
tested for impairment on an annual basis, and between annual tests if indicators
of potential impairment exist, using a fair-value-based approach based on the
market capitalization of the reporting unit. Our annual impairment test was
performed as of February 28, 2009. No impairment of goodwill has been identified
during the period presented. Goodwill is deductible for tax purposes in certain
jurisdictions.
NOTE
9 – Income Taxes
FASB ASC
740, Income Taxes (FASB ASC 740)
addresses the accounting for uncertainty in income taxes recognized in an
entity’s financial statements and prescribes a recognition threshold and
measurement attribute for financial statement disclosure of tax positions taken
or expected to be taken on a tax return. We had $8.4 million and $8.8 million of
unrecognized tax benefits at September 30, 2009 and September 30, 2008,
respectively, all of which would affect our effective income tax rate if
recognized. We recorded a gross decrease in unrecognized tax benefits of $1.6
million for the three month period ended September 30, 2009, as a result of the
lapse of the applicable statute of limitations. As of September 30, 2009, it is
deemed reasonable that we will recognize tax benefits in the amount of $2.3
million in the next twelve months due to the closing of open tax years. The
nature of the uncertainty is related to deductions taken on returns that have
not been examined by the applicable tax authority. Our continuing policy is to
recognize interest and penalties related to income tax matters in income tax
expense. As of September 30, 2009, we had approximately $597,000 accrued for
interest related to uncertain tax positions. The tax years 2002 through 2008
remain open to examination by the major taxing jurisdictions to which we are
subject.
Our
provision for income taxes reflected an effective tax rate of 20% and 12% for
the three month periods ended September 30, 2009 and 2008, respectively and (4)%
and 15% for the nine month periods ended September 30, 2009 and 2008,
respectively. For the three and nine month periods ended September 30, 2009, our
effective tax rate was lower than the U.S. federal statutory rate of 35% due to
a partial release of a deferred tax asset valuation allowance, the research
credit and a decrease in unrecognized tax benefits for uncertain tax positions.
These benefits were partially offset by non-deductible stock-based compensation
expenses, losses in foreign jurisdictions with reduced income tax rates and a
valuation allowance related to a deferred tax asset for which a tax benefit was
previously recognized. The non-deductible stock-based compensation expenses were
a greater percentage of net income in the three and nine month periods ended
September 30, 2009, than they were during the comparable periods in 2008. The
increase in our effective tax rate for the three months ended September 30, 2009
compared to the same period in 2008, was due to losses in foreign jurisdictions
with reduced income tax rates, changes in the valuation allowance related to a
deferred tax asset for which a tax benefit was previously recognized and an
increase in non-deductible stock-based compensation expense as a percentage of
net income. These reductions were partially offset by benefits from the research
credit and an increase in the partial release of a deferred tax asset valuation
allowance as a percentage of net income. The decrease in our effective tax rate
for the nine months ended September 30, 2009 compared to the same period in
2008, was due to the partial release of a deferred tax asset valuation allowance
as a percentage of net income and the research credit. These benefits were
partially offset by an increase in non-deductible stock-based compensation
expenses as a percentage of net income, losses in foreign jurisdictions with
reduced income tax rates and changes in the valuation allowance related to a
deferred tax asset for which tax benefit was previously recognized. For the
three and nine month periods ended September 30, 2008, our effective tax rate
was lower than the U.S. federal statutory rate of 35% primarily as a result of
reduced tax rates in certain foreign jurisdictions, the partial release of a
deferred tax asset valuation allowance, and a decrease in unrecognized tax
benefits for uncertain tax positions.
The tax
position of our Hungarian operation continues to benefit from assets created by
the restructuring of our operations in Hungary which was effective on January 1,
2008. Partial release of the valuation allowance on these assets resulted in
income tax benefits of $1.7 million and $2.4 million for the three month periods
ended September 30, 2009 and 2008, respectively, and $5.9 million and $8.5
million for the nine month periods ended September 30, 2009 and 2008,
respectively. As of September 30, 2009, we had a net deferred tax asset of $19.1
million related to the tax benefit of these assets. This amount is based on
estimated future earnings in Hungary that are deemed more likely than not to be
realized as of September 30, 2009.
Our
ability to predict our level of future profitability in Hungary is very limited
due to significant and frequent changes in the corporate tax law, the unstable
political environment, a restrictive labor code, the volatility of the Hungarian
forint relative to the U.S. dollar and increasing labor costs. This view is also
supported by the rapid and unexpected decline in the global economy in 2008 and
2009, which has made historical results of operations unreliable evidence of the
magnitude of future taxable income beyond a relatively short period. While we
believe our historical operations are a fair indicator that our operations in
Hungary will produce some level of profit in the future, we believe that a
quarterly reassessment of anticipated future taxable income is critical and that
forecasting taxable income beyond two years is not viable at this point in time.
We continue to reevaluate quarterly whether and to what extent we expect to
generate future taxable income in Hungary as well as how far into the future we
can project profitability.
We have
submitted a request to the Hungarian Finance Ministry to obtain a ruling as to
the application of a new tax law providing for an enhanced deduction for
research and development expenses. Should we receive a favorable response to
this request during the three months ended December 31, 2009, we would record a
charge of approximately $15 million to income tax expense and would result in an
increase in our effective income tax rate in that period. In addition, the tax
benefit from assets created by the restructuring may not be available in future
periods. However, we believe the increase in the rate for the periods following
the period in which we record this charge, will be offset substantially by the
effect of the increased benefit from the enhanced deduction for research and
development expenses.
NOTE
10 – Comprehensive Income
Our
comprehensive income is comprised of net income, foreign currency translation,
unrealized gains and losses on forward and option contracts and securities
available for sale. Comprehensive income for the three month and nine month
periods ended September 30, 2009 and 2008, was as follows (in
thousands):
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
September
30,
|
September
30,
|
|||||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Comprehensive
income:
|
||||||||||||||||
|
Net
income
|
$ | 9,931 | $ | 23,159 | $ | 14,719 | $ | 65,509 | ||||||||
|
Foreign
currency translation gains (losses), net of taxes
|
2,413 | (7,240 | ) | 2,908 | (2,312 | ) | ||||||||||
|
Unrealized
gains (losses) on derivative instruments, net of taxes
|
(1,987 | ) | 6,614 | (1,838 | ) | 5,408 | ||||||||||
|
Unrealized
gains (losses) on available for sale securities, net of
taxes
|
241 | (182 | ) | 115 | (778 | ) | ||||||||||
|
Total
comprehensive income
|
$ | 10,598 | $ | 22,351 | $ | 15,904 | $ | 67,827 | ||||||||
NOTE
11 – Stock-Based Compensation Plans
Stock
option plans
Our
stockholders approved the 1994 Incentive Stock Option Plan (the “1994 Plan”) on
May 9, 1994. At the time of approval, 9,112,500 shares of our common stock were
reserved for issuance under this plan. In 1997, an additional 7,087,500 shares
of our common stock were reserved for issuance under this plan, and an
additional 750,000 shares were reserved for issuance under this plan, as
amended, in 2004. The 1994 Plan terminated in May 2005, except with respect to
outstanding awards previously granted thereunder. Awards under the plan were
either incentive stock options within the meaning of Section 422 of the Internal
Revenue Code or nonqualified options. The right to purchase shares vests over a
five to ten-year period, beginning on the date of grant. Vesting of ten year
awards may accelerate based on the Company’s previous year’s earnings and
revenue growth but shares cannot accelerate to vest over a period of less than
five years. Stock options must be exercised within ten years from date of grant.
Stock options were issued at the market price at the grant date. As part of the
requirements of FASB ASC 718, Compensation – Stock
Compensation (FASB ASC 718), we are required to estimate potential
forfeitures of stock grants and adjust compensation cost recorded accordingly.
The estimate of forfeitures will be adjusted over the requisite service period
to the extent that actual forfeitures differ, or are expected to differ, from
such estimates. Changes in estimated forfeitures will be recognized through a
cumulative catch-up adjustment in the period of change and will also impact the
amount of stock compensation expense to be recognized in future
periods.
Transactions
under all stock option plans are summarized as follows:
|
Stock
Options (unaudited)
|
||||||||
|
|
Number
of shares under
option
|
Weighted
average
Exercise price
|
||||||
|
Outstanding
at December 31,
2008
|
4,272,567 | $ | 25.97 | |||||
|
Exercised
|
(309,486 | ) | 14.09 | |||||
|
Canceled
|
(169,422 | ) | 26.20 | |||||
|
Granted
|
— | — | ||||||
|
Outstanding
at September 30,
2009
|
3,793,659 | $ | 26.83 | |||||
The
aggregate intrinsic value of stock options at exercise, represented in the table
above, was $2 million for the nine months ended September 30, 2009. Total
unrecognized stock-based compensation expense related to non-vested stock
options was approximately $3 million as of September 30, 2009, related to
approximately 247,000 shares with a per share weighted average fair value of
$17.30. We anticipate this expense to be recognized over a weighted average
period of approximately 3.7 years.
|
Outstanding
and Exercisable by Price Range as of September 30, 2009
(unaudited)
|
||||||||||||||||||||||
|
Options Outstanding
|
Options Exercisable
|
|||||||||||||||||||||
|
Range of Exercise prices
|
Number
outstanding as of
9/30/2009
|
Weighted
average remaining contractual
life
|
Weighted
average exercise
price
|
Number
exercisable as of
9/30/2009
|
Weighted
average exercise
price
|
|||||||||||||||||
| $16.08 – $21.04 | 1,281,991 | 1.96 | $20.69 | 1,223,823 | $20.71 | |||||||||||||||||
| $21.25 – $29.85 | 1,294,169 | 4.11 | $28.03 | 1,113,980 | $27.96 | |||||||||||||||||
| $30.51 – $34.38 | 1,217,499 | 0.66 | $32.02 | 1,209,006 | $32.02 | |||||||||||||||||
| $16.08 – $34.38 | 3,793,659 | 2.28 | $26.83 | 3,546,809 | $26.84 | |||||||||||||||||
The
weighted average remaining contractual life of options exercisable as of
September 30, 2009 was 2.2 years. The aggregate intrinsic value of options
outstanding as of September 30, 2009 was $3 million. The aggregate intrinsic
value of options currently exercisable as of September 30, 2009 was $3 million.
No options were granted during the nine months ended September 30, 2009 as our
1994 Plan terminated in May 2005.
Restricted
stock plan
Our
stockholders approved our 2005 Incentive Plan on May 10, 2005. At the time of
approval, 2,700,000 shares of our common stock were reserved for issuance under
this plan, as well as the number of shares which had been reserved but not
issued under the 1994 Plan (our incentive stock option plan which terminated in
May 2005), and any shares that returned to the 1994 Plan as a result of
termination of options or repurchase of shares issued under such plan. The 2005
Plan, administered by the Compensation Committee of the Board of Directors,
provides for granting of incentive awards in the form of restricted stock and
restricted stock units (“RSUs”) to directors, executive officers and employees
of the Company and its subsidiaries. Awards vest over a three, five or ten-year
period, beginning on the date of grant. Vesting of ten year awards may
accelerate based on the Company’s previous year’s earnings and growth but ten
year awards cannot accelerate to vest over a period of less than five years.
Shares available for grant at September 30, 2009 were 2,146,227. As part of the
requirements of FASB ASC 718, we are required to estimate potential forfeitures
of RSUs and adjust compensation cost recorded accordingly. The estimate of
forfeitures will be adjusted over the requisite service period to the extent
that actual forfeitures differ, or are expected to differ, from such estimates.
Changes in estimated forfeitures will be recognized through a cumulative
catch-up adjustment in the period of change and will also impact the amount of
stock compensation expense to be recognized in future periods.
Transactions
under the 2005 Incentive Plan are summarized as follows:
|
RSUs
(unaudited)
|
||||||||
|
Number
of RSUs
|
Weighted
Average Grant Price
|
|||||||
|
Balance
at December 31,
2008
|
2,165,228 | $ | 26.99 | |||||
|
Granted
|
537,083 | 20.95 | ||||||
|
Earned
|
(407,156 | ) | 22.04 | |||||
|
Canceled
|
(47,646 | ) | 27.94 | |||||
|
Balance
at September 30,
2009
|
2,247,509 | $ | 26.42 | |||||
Total
unrecognized stock-based compensation expense related to non-vested RSUs was
approximately $59 million as of September 30, 2009, related to 2,247,509 shares
with a per share weighted average fair value of $26.42. We anticipate this
expense to be recognized over a weighted average period of approximately 6.1
years.
Employee
stock purchase plan
Our
employee stock purchase plan permits substantially all domestic employees and
employees of designated subsidiaries to acquire our common stock at a purchase
price of 85% of the lower of the market price at the beginning or the end of the
purchase period. The plan has quarterly purchase periods beginning on February
1, May 1, and November 1 of each year. At our annual shareholders meeting held
on May 7, 2007, our shareholders approved an additional 3 million shares of
common stock to be reserved for issuance under this plan. Employees may
designate up to 15% of their compensation for the purchase of common stock under
this plan. Common stock reserved for future employee purchases aggregated
1,935,287 shares at September 30, 2009. Shares issued under this plan were
658,320 in the nine month period ended September 30, 2009. The weighted average
fair value of the employees’ purchase rights was $18.4 and was estimated using
the Black-Scholes model with the following assumptions:
|
2009
|
||||
|
Dividend
expense yield
|
0.5% | |||
|
Expected
life
|
3
months
|
|||
|
Expected
volatility
|
47% | |||
|
Risk-free
interest rate
|
1.0% | |||
For the
three month and nine month periods ended September 30, 2009 and September 30,
2008, stock-based compensation recorded as a component of cost of sales, sales
and marketing, research and development, and general and administrative was as
follows:
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
September
30,
|
September
30,
|
|||||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Stock-based
compensation
|
||||||||||||||||
|
Cost
of sales
|
$ | 335 | $ | 295 | $ | 975 | $ | 810 | ||||||||
|
Sales
and marketing
|
2,210 | 2,114 | 6,626 | 6,204 | ||||||||||||
|
Research
and development
|
1,929 | 1,867 | 5,349 | 5,160 | ||||||||||||
|
General
and administrative
|
728 | 800 | 2,288 | 2,351 | ||||||||||||
|
Provision
for income taxes
|
(409 | ) | (1,364 | ) | (5,288 | ) | (3,588 | ) | ||||||||
|
Total
|
$ | 4,793 | $ | 3,712 | $ | 9,950 | $ | 10,937 | ||||||||
Authorized
Preferred Stock and Preferred Stock Purchase Rights Plan
We have
5,000,000 authorized shares of preferred stock. On January 21, 2004, our Board
of Directors designated 750,000 of these shares as Series A Participating
Preferred Stock in conjunction with its adoption of a Preferred Stock Rights
Agreement (the “Rights Agreement”) and declaration of a dividend of one
preferred share purchase right (a “Right”) for each share of common stock
outstanding held as of May 10, 2004 or issued thereafter. Each Right will
entitle its holder to purchase one one-thousandth of a share of National
Instruments’ Series A Participating Preferred Stock at an exercise price of
$200, subject to adjustment, under certain circumstances. The Rights Agreement
was not adopted in response to any effort to acquire control of National
Instruments.
The
Rights only become exercisable in certain limited circumstances following the
tenth day after a person or group announces acquisitions of or tender offers for
20% or more of our common stock. In addition, if an acquirer (subject to certain
exclusions for certain current stockholders of National Instruments, an
“Acquiring Person”) obtains 20% or more of our common stock, then each Right
(other than the Rights owned by an Acquiring Person or its affiliates) will
entitle the holder to purchase, for the exercise price, shares of our common
stock having a value equal to two times the exercise price. Under certain
circumstances, our Board of Directors may redeem the Rights, in whole, but not
in part, at a purchase price of $0.01 per Right. The Rights have no voting
privileges and are attached to and automatically traded with our common stock
until the occurrence of specified trigger events. The Rights will expire on the
earlier of May 10, 2014 or the exchange or redemption of the
Rights.
NOTE
12 – Commitments and Contingencies
We offer
a one-year limited warranty on most hardware products, which is included in the
sales price of many of our products. Provision is made for estimated future
warranty costs at the time of sale pursuant to FASB ASC 450, Contingencies (FASB ASC 450), for the estimated costs
that may be incurred under the basic limited warranty. Our estimate is based on
historical experience and product sales during the period.
The
warranty reserve for the nine month periods ended September 30, 2009 and 2008,
respectively, was as follows (in thousands):
|
Nine
Months Ended
|
||||||||
|
September
30,
|
||||||||
|
(unaudited)
|
||||||||
|
2009
|
2008
|
|||||||
|
Balance
at the beginning of the
period
|
$ | 952 | $ | 750 | ||||
|
Accruals
for warranties issued during the
period
|
1,518 | 1,219 | ||||||
|
Settlements
made (in cash or in kind) during the period
|
(1,551 | ) | (1,272 | ) | ||||
|
Balance
at the end of the
period
|
$ | 919 | $ | 697 | ||||
As of
September 30, 2009, we have outstanding guarantees for payment of foreign
operating leases, customs and foreign grants totaling approximately $5.2
million.
As of
September 30, 2009, we have non-cancelable purchase commitments with various
suppliers of customized inventory and inventory components totaling
approximately $6.5 million over the next twelve months.
NOTE 13 – Segment
Information
In
accordance with FASB ASC 280, Segment Reporting (FASB ASC
280), we determine operating segments using the management approach. The
management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of our operating segments. It also requires disclosures about products
and services, geographic areas and major customers.
We have
defined our operating segment based on geographic regions. We sell our products
in three geographic regions. Our sales to these regions share similar economic
characteristics, similar product mix, similar customers, and similar
distribution methods. Accordingly, we have elected to aggregate these three
geographic regions into a single operating segment. Revenue from the sale of our
products which are similar in nature and software maintenance are reflected as
total net sales in our Consolidated Statements of Income.
Total net
sales, operating income, interest income and long-lived assets, classified by
the major geographic areas in which we operate, are as follows (in
thousands):
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
September
30,
|
September
30,
|
|||||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Net
sales:
|
||||||||||||||||
|
Americas:
|
||||||||||||||||
|
Unaffiliated customer
sales
|
$ | 75,459 | $ | 97,021 | $ | 211,991 | $ | 269,527 | ||||||||
|
Geographic
transfers
|
19,498 | 34,446 | 61,872 | 95,386 | ||||||||||||
| 94,957 | 131,467 | 273,863 | 364,913 | |||||||||||||
|
Europe:
|
||||||||||||||||
|
Unaffiliated customer
sales
|
46,683 | 66,702 | 143,026 | 197,935 | ||||||||||||
|
Geographic
transfers
|
44,460 | 54,985 | 139,709 | 151,755 | ||||||||||||
| 91,143 | 121,687 | 282,735 | 349,690 | |||||||||||||
|
Asia
Pacific:
|
||||||||||||||||
|
Unaffiliated customer
sales
|
42,893 | 51,315 | 119,980 | 150,968 | ||||||||||||
|
Eliminations
|
(63,958 | ) | (89,431 | ) | (201,581 | ) | (247,141 | ) | ||||||||
| $ | 165,035 | $ | 215,038 | $ | 474,997 | $ | 618,430 | |||||||||
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
September
30,
|
September
30,
|
|||||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Operating
income:
|
||||||||||||||||
|
Americas
|
$ | 15,058 | $ | 21,567 | $ | 28,658 | $ | 53,654 | ||||||||
|
Europe
|
20,087 | 26,361 | 52,562 | 76,088 | ||||||||||||
|
Asia
Pacific
|
10,559 | 17,034 | 28,582 | 49,912 | ||||||||||||
|
Unallocated:
|
||||||||||||||||
|
Research
and development expenses
|
(35,016 | ) | (37,016 | ) | (99,252 | ) | (105,808 | ) | ||||||||
| $ | 10,688 | $ | 27,946 | $ | 10,550 | $ | 73,846 | |||||||||
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
September
30,
|
September
30,
|
|||||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Interest
income:
|
||||||||||||||||